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Gasoline prices' slow descent fits a familiar pattern

An industry adage says prices go up like a rocket but drift down like a feather. After rising 50 cents a gallon in a week, the state average is down just a tad.

October 15, 2012|By Ronald D. White, Los Angeles Times
  • The phenomenon in which gasoline prices rise faster than they fall is know as “price asymmetry” and has been studied numerous times. Above, a driver fills up at a gas station in Alhambra.
The phenomenon in which gasoline prices rise faster than they fall is know… (Frederic J. Brown, AFP /…)

Gasoline prices in California are dribbling lower, with the average price slipping as much as a penny a day from record highs reached last week, fuel surveys show.

"It's all rigged. They've got us over a barrel, literally," grumbled restaurant manager Jay Moss, who paid $4.99 a gallon Sunday at a Mobil station in Santa Monica. "It's down a little, but not much. I'm just tired of looking."

Although the slow pace of relief might be annoying to drivers, it's a familiar pattern to energy economists. There's even an old industry adage that gasoline prices shoot up like a rocket but drift down like a feather.

Experts call the phenomenon "price asymmetry." Also known as "downward sticky" prices, the concept has been studied numerous times.

U.S. Energy Information Administration "data confirms the notion that retail gasoline prices appear asymmetric, typically rising more quickly than they fall," according to a 1999 study by the agency of a Midwest price increase that struck fast but faded slowly.

"In other words, retail gasoline prices do sometimes rise faster than they fall," wrote John Cook, then director of the Energy Information Administration's petroleum division.

It can happen because consumers aren't the only ones caught unawares. Gas station owners have to decide whether to buy much more expensive fuel or shut their pumps. Mostly, they decided to buy.

"You don't want to be the one person caught without a chair when the music stops," said Joe Hahn, a professor at Pepperdine University's Graziadio School of Business and Management, about the pressure station owners face to keep their pumps open. "The highest bid always wins an auction, but in the case of fuel prices, the highest bidder is also setting the price level of the whole market."

Since the state's one-week price surge of about 50 cents a gallon, California's average price for a gallon of self-serve regular gasoline has declined 3.6 cents to $4.623, according to the Energy Department's weekly survey released Monday, and 6.2 cents to $4.609, according to AAA's daily survey. The two surveys use different methodologies but usually move in the same direction and report averages within pennies of each other.

The price surge, nicknamed "Gasageddon" by analyst Tom Kloza, started Oct. 1 with a power failure at Exxon Mobil Corp.'s Torrance refinery. Ordinarily, the disruption wouldn't have been a big deal because the plant was back to normal a few days later.

But based on updated statistics received Friday by the California Energy Commission, it became clear that the refinery went down when the state was near the bottom of its five-year averages in fuel supplies, fuel production and in the stockpiles of components needed to make the state's expensive blend of clean-burning gasoline, said Gordon Schremp, the agency's senior fuels analyst.

"We have seen low inventories like this, but we didn't have a price spike then because we didn't have another refinery problem," Schremp said. "Here, we had a significant refinery problem."

The Torrance refinery is the fifth largest of 14 gasoline-producing facilities in California. What's more, the state's third biggest refinery, Chevron Corp.'s plant in Richmond, has been in limited production since a fire in August.

That explains the rocket phase. The feather stage happens because once the crisis has passed "there's always a reluctance among gas station owners to drop prices too quickly," said Kloza, chief oil analyst for the Oil Price Information Service.

Another reason, Hahn said, is that the expensive gasoline has to be sold before cheaper supplies can be purchased.

"How quickly it does depends on where those stations are located and on how busy they are," Hahn said.

In addition, as prices fall after a sudden surge, service station operators try to capture profits lost on the way up when they couldn't hike prices fast enough, analysts said.

Consumers bear some of the blame too, said Matt Lewis, an Ohio State University professor whose specialties include research on retail fuel prices and the behavior of motorists.

Lewis said that drivers who aggressively search for the best prices as they are rising stop once they begin to trickle down again. When a station owner sees customers flocking in after a price drop of just a penny a gallon, they have no incentive to lower their prices faster, he said.

"If every consumer kept searching for the best price, this asymmetry would likely pretty much go away," Lewis said.

Phil Flynn, an analyst for Price Futures Group in Chicago, sees California's average price slipping closer to $4 a gallon "if there are no major refinery problems."

"California remains in a tough situation," Flynn said. "There is no room for error.... Lose another refinery and you could shoot to a new record out there."

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